Marketing II: Break-Even Analysis

TiE Young Entrepreneurs (TYE)

A TiE-Boston Chapter Initiative

MARKETING PART II | 31 January 2009

SESSION 3: What is an Break-even Analysis

Recap of what you have learnt…

What is Marketing (4 P’s) Why do Marketing (Purpose) How to do effective Marketing

Need to develop Vision to drive business Analyze consumers by segment Focus your brand

Understand key concepts/elements to be effectiveMarket Research Competitive strategies/advantagesAdvertising & PublicityBreak-even analysis

Can you afford your marketing plan & How to calculate it

What is Break-even Analysis?

Key element of marketing plan Answers: Can you afford your Marketing

Plan? Sell enough units to cover its cost! Marketing is a fixed cost

It is not affected by the number of units sold

Break-even unit formula = Fixed operating cost / Gross profit per unit

Why Break-even Analysis

Businesses do this analysis to help them arrive at a price allow them to make some profit know when that will happen in the future

It is done for all businesses – little or big Main reason is to have some idea of

how much to sell before you can start making a profit

If the number you are trying to get is too difficult then maybe you can change it

increasing your price or cutting your cost … that is the key to the analysis

Understand this, makes you more competitive in the market place

Example: Basic Calculations

Item Description Price Calculation

Sum

Cost of Each unit $2

Sale Price of unit $4

Total Units Sold 25

Revenue [Unit Sale Price * Units Sold] $4 * 25 $100

COGS [Units Sold * Cost of Unit] $50 25 * $2

Other Variable Costs $0

Total Variable Cost [COGS + Other VC] $50 $50 + $0

Gross Profit [Revenue – Total Variable Cost] $100 - 50 $50

Total Fixed Cost (Marketing) $24

Pre-Tax Net Profit [Gross Profit – Total Fixed Cost]

$50 - $24 $26

Tax $6

Net Profit [Pre-Tax Net Profit – Tax] $26 - $6 $20

Specifics: Break-even Units


Sum



Total Units Sold 25





Gross Profit [Revenue – Total Variable Cost] $100 * $50

$50

Gross Profit Per Unit = Total Gross Profits/Units Sold

$50/25 $2


Pre-Tax Net Profit [Gross Profit – Total Fixed Cost]

$50 - $24 $26

Tax $6


Break-even Units = Fixed Operating Cost/Gross Profit Per Unit

$24/$2 $12

Change in Units Sold


Sum



Total Units Sold 12





Gross Profit [Revenue – Total Variable Cost] $48 - $24 $24


Pre-Tax Net Profit [Gross Profit – Total Fixed Cost] $24 - $24 $0

Tax $0


Gross Profit Per Unit = Total Gross Profits/Units Sold $24/12 $2

Break-even Units = Fixed Operating Cost/Gross Profit Per Unit

$24/$2 $12

At break-even point

Business operates at no profit and no loss

Any unit sold below the break-even units will bring loss to business, and

Any unit sold above the break-even units will bring profit to business

Note: Costs

Mostly all business's costs fall into Variable costs

increase directly in proportion to the level of sales in dollars or units sold. change in proportion to the activity of a business

sometimes referred to as unit-level costs since they vary with the number of units produced.

Examples: cost of goods sold (COGS), sales commissions, shipping charges, delivery charges, costs of direct materials or supplies, wages of temporary or part time employees, bonuses

Fixed costs Stays same regardless of level of sales Examples: marketing related, rent, insurance, equipment

expenses, business licenses, salary of permanent full time employees

Variable and Fixed costs combined = Total Costs

Element of dependency – normal costs

Remains, no dependency

Total Costs

UNITS

$

Fixed Costs

Variable Costs

Total Costs

Of Production

Total Revenue

& Cost Total Variable Costs

Total Fixed Costs

More

Higher

Loss

Profit

Break evenPoint

Revenue

Note on Break-even

… it requires estimating a single per-unit variable cost, and a single per-unit price or revenue, for the entire business

.. it is hard to do in a business that has a collection of products or services to sell

In a nut shell…

In the "REAL WORLD" true costs are difficult to calculate there are many things that can go wrong mistakes can happen All that can affect the calculation numbers

Break-even analysis is sometimes difficult to calculate mathematics does not allow for calculating "COMPETITIVE ENVIRONMENT"

This is why competition may cause you to make change like lower your price, or the demand itself may change

What does this mean? You will have to change your calculation about

WHEN you break even!

Example 2: Calculation Formula: P=U(p-V)-F (P= Profit, p=price, U=units sold, V= variable costs and F=fixed costs) Selling Price (p)= $10.00, Units Sold (U) = 1,000; Revenue = 10,000 Assume Total fixed costs (F) = $7,700, Total variable costs (V) = $4.50/unit

To Calculate Profit P=1,000($10.00 - $4.50) - $7,700 = $5,500 - $7,700 = -$2,200 P=$5,500 - $7,700 = -$2,200

What happened? Instead of making money we have just lost $2,200. At break even the $2,200 number should be $0.

We can't make money at 1,000 units, so how many must we really sell to break even? Fixed costs (F) are $7,700, price (p) is still $10.00 and variable costs (V) are $4.50/unit

This is what we need to do to calculate breakeven: Breakeven Point = Fixed Costs/(Unit Selling Price - Variable Costs) Or take your fixed costs, divided by your price, minus your variable costs (p) price minus (V) variable costs = X; Fixed Costs/X = Breakeven units $10.00 - $4.50 = $5.50; $7,700/$5.50 = 1,400 units New Revenue desired to break even= $14,000 ($10*1,400)

Validate your break even calculation to see if we get 0: 1,400($10-4.50) = $7,700; $7,700 - $7,700 = 0 (no profit or loss) If we maintain our price/expenses, we need to sell 1,400 units of our product to break even. Note: If we raise our price or reduce expenses we can sell less.

Q&A

?????